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bankruptcy definitionIf you landed on this page, you are probably wondering if bankruptcy is the best option for you to get rid of your debt. Truth be told, any financial expert will never give this as the first option. While it may seem like the easiest way out, the consequences and bad effects on your credit history will not make it worth it in all circumstances.

The Bankruptcy Code has undergone various changes over the years. In 1934, it was described to benefit the debtor who have maintained their honesty in admitting to the unfortunate events that led them unable to pay off their financial obligations. This was meant to give them a fresh start – to rebuild their losses and start anew – without the pressures of mounting debts and harassing creditors.

To date, there are 6 important chapters that involve various types of bankruptcy filing. The most recent one was in 2005. It was done as a response to how people in debt have reacted to the economic recession. It was meant to protect both creditors and debtors.

Bankruptcy Basics

The country is divided into 90 bankruptcy districts. All the States have one – some even more than the others. A US bankruptcy judge presides over every case and delivers the final decision. They decide if the debtor should be awarded a discharge of debt and how they should file to declare it. Most of the time, the debtor will not even meet with this judge. The only meeting that they will have in connection with this case is during the 341 meeting wherein the creditors will also come in to question them.

The Bankruptcy Code holds 6 different cases where individuals, organizations or groups can file.

Chapter 11. Reorganization
This type of bankruptcy filing is commonly used by companies and other commercial businesses that wish to create a reorganization that is sanctioned by the courts. The intention of this is to repay the creditors while still being able to financially afford to continue with business operations. This plan must be provided for by the debtor within 120 days after the filing of the case. They are also responsible for providing a disclosure statement to the creditors that will allow them to evaluate the reorganization plan. If the court approves of the plan, the result is a new plan that will involve the repayment of only a percentage of the original balance owed – while the rest will be discharged.

Chapter 12. Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income
The name of this chapter is somewhat self explanatory – at least for the people involved. Here, the debtor is asked to provide a plan that will contain how they will pay off their debts through a payment schedule that will not last more than 3 years. The court does have the right to increase this term to 5 years if there is a need. In this case, a trustee is involved to help disburse the payments to the creditors – in accordance to the approved plans by the court. This arrangement allows the business to continue while the repayment is going on.

Chapter 9. Adjustment of Debts of a Municipality
This mode of bankruptcy is specific to municipalities and other forms of it such as villages, etc. This type allows for re-organization of the filing party. This means that with the court’s approval, they only fulfill a portion of their financial obligation to debtors and the remaining balance is stricken off the books.

Chapter 15. Ancillary and Other Cross-Border Cases
This type of bankruptcy directly deals with insolvency that occurs beyond the borders of the United States. Its objective is to apply the rule of bankruptcy law of the US and as need be, the laws of other countries as well. This gives the business entity filing for bankruptcy the chance to be tried for US and country specific bankruptcy law applications.

What are the Different Bankruptcy Laws Affecting You?

There are two bankruptcy laws affecting the personal finances of individuals. They are Chapter 7 and the most recent Chapter 13.

Chapter 7. Liquidation
This method of the bankruptcy law for individuals involves liquidating all assets to pay off obligations. When used, the court assigns a trustee to help the debtor liquidate all available assets. This supervision is needed to ensure that everything that transpires is subjected under law accepted procedures.

This of course takes a second lien on particular exempt properties by the debtor. Secured creditors usually are the first in line of getting cash settlement in cases that the debtor has assets to convert. In most instances though, the debtor does not usually have enough assets to pay-off their obligation. In these cases, their debts are just discharged by the courts for debts that are considered dischargeable.

There have been efforts to prevent the abuse of this bankruptcy law through amendments and putting in a so called “means test” for the debtor. This includes conducting a thorough investigation to determine if the income of the filing party, usually an individual, is in excess of certain benchmarks of the court. Once proven that they are well way beyond the threshold, they might not be considered for the relief of Chapter 7. Instead, they will be under Chapter 13.

Chapter 13. Adjustment of Debts of an Individual with Regular Income
Anyone who is not permitted to file for bankruptcy under Chapter 7 will be directed to Chapter 13. We’ve mentioned previously the “Means Test” and this refers to the measurement of a person’s income. If you have a regular source of income and that is within the middle and high income bracket, you will not be allowed to have your unsecured debts discharged immediately. The upside is the debtor is allowed to keep some of their valuable assets.

Instead of liquidating all assets, a plan is set to the be proposed by the debtor that will stretch for 3 to 5 years. This repayment plan will be approved only by the court through the bankruptcy judge. The approval depends on whether the plan meets the confirmation requirements as stated under the Bankruptcy Code. The total debt to be paid will be based on the income that is anticipated over the repayment plan, after which the rest of the debt is considered discharged.

To know more about the Bankruptcy Code and the process involved, feel free to visit the US Courts – Federal Bankruptcy website.

Despite the existence of the Bankruptcy Code, this is meant to be taken as the last resort. Financial experts will advise you to seek other means prior to filing for bankruptcy.
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Debt settlement is proving to be a better option – an alternative to filing bankruptcy. is here to help debt-ridden individuals come up with a repayment plan that will satisfy their creditors while still having enough for their basic needs. Give us a call or fill up the short form at the right side of this page. We are happy to get in touch with you to discuss how you can achieve a debt free life.

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